Alexander Mürmann's article ‘The Dark Side of Liquid Bonds in Fire Sales’ has been accepted for publication in the journal Management Science. The co-authors are Christoph Scheuch (Humboldt University of Berlin) and Chaderina, Maria (University of Oregon).

The paper shows that when investors must raise cash quickly, selling the most liquid and widely held bonds—though individually optimal—can trigger the largest price drops because many investors rush to sell the same assets at once. This crowding effect makes liquid-bond fire sales collectively inefficient and amplifies systemic risk. Evidence from insurers around natural catastrophes confirms that they sell liquid bonds first and that these bonds suffer the steepest price declines, highlighting the regulatory importance of overlapping liquid holdings.

The Dark Side of Liquid Bonds in Fire Sales

Abstract
We investigate which bonds investors should sell when they need to raise cash quickly. Our model shows that the intuitive strategy of selling the most liquid bonds can backfire. In over-the-counter markets, liquid bonds trade fastest, but when many investors simultaneously sell the same liquid, widely held bonds while buying capital is scarce, their prices fall the most. Individual investors do not fully internalize how their sales amplify the liquidation losses of others, making the outcome privately optimal but collectively inefficient. We test these predictions using Property & Casualty insurers around major natural catastrophes and find that insurers sell liquid bonds first, only partially avoid crowded bonds, and that liquid bonds experience the largest price declines during fire sales. The overlap in liquid holdings thus emerges as a key source of systemic risk that should receive greater weight in regulation and risk measurement.

Congratulation!